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Division 7A Checklist

    The following checklist will assist you to determine whether Division 7A applies.

    To be completed by all private companies each year.

     Yes No A1. Does the private company have a Distributable Surplus at the end of ? ? the year of income (section 109Y)?

    If the answer is yes, Division 7A can potentially apply. Continue to B1.* If the answer is no, Division 7A cannot result in the private company being deemed to have paid an

    unfranked dividend (in which case there is no need to proceed).

    * Note that where the Distributable Surplus of the private company is less than the amount of any deemed unfranked dividend calculated in accordance with Division 7A, the amount of the deemed unfranked dividend will be proportionately reduced (i.e. capped) to the balance of the Distributable Surplus existing in the private company.

    B1. Did one of the following transactions occur during the current financial year?

     Yes No The private company made a payment to a shareholder, or an associate of a ? ? shareholder, other than a loan (section 109C)?

    A loan provided by the private company to a shareholder, or an associate of a

    shareholder, prior to 4 December 1997 was varied by increasing the amount of ? ? the loan or extending the term of the loan (section 109D(5))?

    The private company made a loan to a shareholder or an associate of a ? ? shareholder on or after 4 December 1997 (sections 109D109E)? A debt owed by a shareholder, or an associate of a shareholder, to the private ? ? company was forgiven* by the private company (section 109F)?

    If the answer to any of the above is yes, continue to C1.

    If the answer to all of the above is no, continue to D1.

    * Note sub-section 109F(3) provides that a debt is forgiven where the amount of the debt would be forgiven under section 245-35 of Schedule 2C. Broadly, this would include where the debt is realised, waived or otherwise extinguished or the debt is deemed to be forgiven under a statute of limitations.

    C1. Does the transaction identified in B1 satisfy any of the following criteria?

     Yes No The payment made by the private company represents the repayment of a ? ? genuine debt (section 109J).

    The payment or loan made by the private company was made to another ? ? private company (section 109K).

    The payment or loan is otherwise assessable to the shareholder, or an ? ? associate of the shareholder (section 109L).

    The loan was made in the ordinary course of business of the private company ? ? and on arm‟s length terms (section 109M).

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     Division 7A Checklist

    Yes No

    The loan or payment represents a distribution made by a liquidator in the course ? ? of winding-up a company (section 109NA).

    The loan represents a loan made to employees for the purpose of purchasing shares ? ? or rights under an employee share scheme defined in Div 13A (section 109NB). The loan was established on excluded loan terms (section 109N). ? ?

    The loan was established on excluded loan terms* before the earlier of the due

    date for lodgment of the private company‟s return of income for the current year ? ? and the actual date of lodgment of the company‟s return of income for the

    current year (section 109N).

    The loan was fully repaid before the earlier of the due date for lodgment of the

    private company‟s return of income for the current year and the actual date of ? ? lodgment of the private company‟s return of income for the current year (sub-sections 109D(1)(b) and 109D(6)).

    A payment was made during the current year which was converted into a loan

    which was either repaid or established on excluded arms loan terms before the

    earlier of the due date for lodgement of the private company‟s return of income ? ? for the current year and the actual date of lodgement of the company‟s return of

    income for the current year.

    The forgiven debt was owed to the private company by another private ? ? company (sub-section 109G(1)).

    The forgiven debt does not result in a deemed dividend under other exemptions

    including the undue hardship exemption, the debtor is bankrupt or the debt ? ? would constitute a statute barred loan subject to PS LA 2006/2 (GA) (which should not be regarded as a licence to write off and clean out old loans). If the answer to any of the above is yes, the loan or payment will not be classified as a deemed unfranked dividend in the current year.

    If the answer to each of the above is no, the loan, payment or debt forgiveness will be classified as a deemed unfranked dividend in the current year, subject to the amount of the Distributable Surplus

    at the end of the current year.

    Note: The franking provisions have been amended to remove the automatic debiting of a private

    company‟s franking account when a deemed dividend arises under Division 7A. However, deemed

    dividends will continue to be included in the assessable income of the shareholder or their associate

    as unfranked dividends. This change is effective from 1 July 2006. Note also that pursuant to proposed amendments effective from 1 July 2001, the Commissioner of

    Taxation has a discretion to disregard Division 7A where an honest mistake or inadvertent omission

    has been made.

    Continue to D1.

    * Note a pro forma agreement with excluded loan terms is included in the Div 7A Loan Calculator, an electronic product created by Moore Stephens and published by Thomson.

    ** The loan term of excluded loans can now be varied following changes to the excluded loan rules which apply from 1 July 2006. Broadly, unsecured loans with a term of 7 years may be refinanced and converted into loans secured by a registered mortgage over real property with a longer term provided the aggregate term of such a refinanced loan does not exceed 25 years from the date of the original loan to the repayment of the refinanced loan. Conversely, a secured loan can be converted

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Division 7A Checklist

    into an unsecured loan with a corresponding reduction in the loan term.

D1. Amalgamated loans (section 109E)

    Yes No Not Applicable

    In relation to loans established on excluded loan terms in prior

    years (in accordance with section 109N), has a minimum ? ? ? repayment been made on the loan in the current financial year?* If the answer is yes, the loan will not be classified as a deemed unfranked dividend in the current

    financial year.

    If the answer is no, the amount of any unpaid portion of the required minimum yearly repayments

    will be deemed to be an unfranked dividend in the current year, subject to the amount of the Distributable Surplus at the end of the current year.

    Continue to E1.

    * Note that if the loan was established as an excluded loan in the current financial year, a minimum repayment will not be required to be made on the loan in the current financial year. This is on the basis that the first minimum repayment is only required to be made in the year of income after which the loan was first established.

E1. Was a payment or loan made through an interposed entity in the current financial year

    (section 109T)?

    Yes No Not Applicable

    Did the private company provide a loan or a payment to an ? ? ? interposed entity (including a company, partnership, trust or

    individual) in the current financial year (section 109T)?* Note: The interposed entity rules have been amended so that a

    deemed dividend will nor arise where there is a loan made by the

    interposed entity to the shareholder, or an associate of the

    shareholder, and the loan was put on excluded loan terms under

    section 109N. This change is effective from 1 July 2006. If the answer is yes, the first set of interposed entity arrangement (“IEA”) provisions could apply*.

    Broadly, the IEA provisions apply where a reasonable person would conclude (having regard to all

    of the circumstances) that the private company made the payment or loan to the interposed entity

    solely or mainly so that the interposed entity would provide a payment or loan to the target entity.

    The result of the IEA provisions applying is that where the target entity is a shareholder or an associate of a shareholder of the private company, there will be a deemed loan or payment (and thus potentially

    a deemed unfranked dividend paid) provided directly from the private company to the target entity.#

    Example

    Company A makes a loan of $50,000 to Company B (a related company with no Distributable Surplus) on the condition that Company B will make a loan of the same amount to Mr A, a

    shareholder in Company A. Ordinarily, the loan from Company A to Company B would not be

    classified as a deemed unfranked dividend because of section 109K. Furthermore, the loan from

    Company B to Mr A would not be classified as a deemed unfranked dividend because Company B

    has no Distributable Surplus.

    Company B is an interposed entity in relation to Company A. Mr A is the target entity in relation to the loan of $50,000 made by Company A to Company B. Company A will be deemed to have paid an unfranked dividend of $50,000 to Mr A, subject to the amount of the Distributable Surplus of

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     Division 7A Checklist

    Company A at the end of the year of income in which Company B makes a loan of $50,000 to Mr A.

    Continue to F1.

    * Note that the first set of interposed entity arrangement provisions will not apply where the loan or payment provided from the private company to the interposed entity has already been classified as a deemed unfranked dividend in accordance with Division 7A (subsection 109T(3)).

    # Note also that where the target entity is another private company, the deemed payment or loan will not be classified as a deemed unfranked dividend in accordance with section 109K.

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     Division 7A Checklist

F1. Payment or loan by interposed entity relying on guarantee by private company (section

    109U)

    Yes No

    Did the private company guarantee a loan in the current year? ? ?

    If the answer is yes, the second set of IEA provisions could apply. Broadly, the second set of IEA provisions apply where

    ? a reasonable person would conclude (having regard to all the circumstances) that the private

    company (“the head company”) gave the guarantee to a second private company (“the first

    interposed entity”) solely or mainly so that either the first interposed entity would make a loan to

    another entity (“the target entity”) or a third private company interposed between the first

    interposed entity and the target entity (“the second interposed entity”) would make a payment or

    loan to the target entity; and

    ? the amount of the payment or loan to the target entity is greater than the Distributable Surplus

    for the first interposed entity or, if appropriate, the second interposed entity. The result of the second set of IEA provisions applying is that where the target entity is a

    shareholder or associate of a shareholder of the head company, there will be a deemed loan or

    payment made directly from the head company to the target entity and thus, potentially, a deemed unfranked dividend paid.*

    Continue to F2.

    * Note that where the target entity is another private company, the deemed payment or loan by the head company will not be classified as a deemed unfranked dividend in accordance with section 109K.

    F2. Did a private company provide a loan guarantee (section 109UA)?

    Yes No

    Has the private company provided a guarantee to enable a loan to be provided ? ? to a shareholder or an associate of a shareholder of the private company in any year of income?

    Following recent amendments where a shareholder, or the associate of a

    shareholder, defaults on a loan guaranteed by a private company, the

    shareholder may enter into a loan with the company which meets the excluded

    loan term requirements of s 109N so that a deemed dividend will not arise.

    These changes are effective from 1 July 2006.

    If the answer is yes and the private company is required to make a payment under the guarantee in

    the current year (i.e. the guarantee is „called on‟ in the current financial year), the private company

    will be deemed to have made a payment (and potentially to have paid a deemed unfranked

    dividend) directly to its shareholder or associate.*

    Continue to G1.

    * Note that if the recipient of the deemed payment (i.e. the entity that defaults on the loan) is another private company, the deemed payment will not be classified as a deemed unfranked dividend in accordance with section 109K.

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     Division 7A Checklist

    G1. Loan by trustee on or after 12 December 2002 to a shareholder, or an associate of a shareholder, of a private company, where a trustee holds an unpaid present entitlement on

    behalf of the private company (Subdivision EA).

     Yes No

    (a) Did the trustee make a loan to a shareholder, or an associate of a

    shareholder, of a private company (except a shareholder or associate that is a

    company) during the current year that was not fully repaid before the earlier of ? ? the due date for lodgement and the actual date of lodgement of the trustee‟s

    return of income for the trust for the current year?

    If the answer is no to question (a), continue directly to G3. If the answer is yes to question (a), continue to questions (b) and (c) within G1.

    (b) Was the private company presently entitled to an amount from the net ? ? income of the trust estate at the time the loan was made? (c) Where the loan was made by the trust on or after 19 February 2004, did the

    private company become presently entitled to an amount from the net income of

    the trust estate after the loan was made but before the earlier of the due date ? ? for lodgment and the actual date of lodgment of the trustee‟s return of income

    for the trust for the current year?

    If the answer is no to questions (b) and (c), continue directly to G3. If the answer is yes to either question (b) or question (c), continue to question (d) within G1.

    (d) Was the whole amount of the present entitlement not paid to the private

    company from the trust estate before the earlier of the due date for lodgment ? ? and the actual date of lodgment of the trustee‟s return of income for the trust for

    the current year?

    If the answer is yes to question (d), continue to G2.

    If the answer is no to question (d), Subdivision EA will not be applicable to the loan. Continue to

    G3.

G2. Loan placed on excluded terms.

    Yes No

    Did the trustee and the shareholder or shareholder‟s associate place the loan

    on excluded terms* before the earlier of the due date for lodgment and the ? ? actual date of lodgment of the trustee‟s return of income for the trust for the

    current year?

    If the answer is yes, Subdivision EA will not be applicable to the loan. If the answer is no, the trust may be deemed to have paid a deemed unfranked dividend to the

    shareholder (or associate of a shareholder) of the private company. * Note a pro forma agreement with excluded loan terms is included in the Div 7A Loan Calculator, an electronic product created by Moore Stephens and published by Thomson.

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Division 7A Checklist

G3. Payment by trustee on or after 12 December 2002 to a shareholder, or an associate of a

    shareholder, of a private company, in circumstances where a trustee holds an unpaid present

    entitlement on behalf of the private company (Subdivision EA).

     Yes No (a) Did a trustee make a payment to a shareholder, or an associate of a

    shareholder, of a private company (except a shareholder or associate that is a ? ? company) during the current year, other than a loan?

    If the answer is no to question (a), continue directly to G4.

    If the answer is yes to question (a), continue to question (b) within G3.

(b) Was the payment a discharge or a reduction in a present entitlement of the

    shareholder or an associate of the shareholder that is wholly or partly ? ? attributable to an amount that represents an unrealised gain* in the trust? If the answer is no to question (b), continue directly to G4.

    If the answer is yes to question (b), continue to questions (c) and (d) within G3.

(c) Was the private company presently entitled to an amount from the net

    income of the trust estate at the time the payment was made? ? ? (d) Where the payment was made by the trust on or after 19 February 2004, did

    the private company become presently entitled to an amount from the net

    income of the trust estate after the payment was made but before the earlier of

    the due date for lodgment and the actual date of lodgment of the trustee‟s return ? ? of income for the trust for the current year?

    If the answer is no to questions (c) and (d), continue directly to G4. If the answer is yes to either question (b) or question (c), continue to question (e) within G3.

(e) Was the whole amount of the present entitlement not paid to the private

    company from the trust before the earlier of the due date for lodgment and the

    ? ? actual date of lodgment of the trustee‟s return of income for the trust for the current year?

    If the answer is yes to question (e), the trust may be deemed to have paid a deemed unfranked

    dividend to the shareholder (or associate of a shareholder) of the private company. If the answer is no to question (e), Subdivision EA will not be applicable to the payment. Continue to G4.

    * Note sub-section 109XA(7) defines an unrealised gain as „any unrealised gain, whether of a capital or income nature‟. A common example is a capital profit generated from the revaluation of an asset.

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Division 7A Checklist

    G4. Debt forgiven by trustee on or after 12 December 2002 in favour of a shareholder, or an associate of a shareholder, of a private company in circumstances where a trustee holds an

    unpaid present entitlement on behalf of the private company (Subdivision EA).

     Yes No (a) Was all or part of a debt owed to a trustee by a shareholder or an associate

    of a shareholder of a private company (except a shareholder or associate that is ? ? a company) forgiven* during the current year?

    If the answer is no to question (a), you have completed the checklist.

    If the answer is yes to question (a), continue to questions (b) and (c) within G4. * Note sub-section 109F(3) provides that a debt is forgiven where the amount of the debt would be forgiven under section 245?35 of Schedule 2C. Broadly, this would include where the debt is released, waived or otherwise extinguished or where the debt is deemed to be forgiven under a statute of limitations.

(b) Was the private company presently entitled to an amount from the net

    income of the trust estate at the time the debt was forgiven? ? ? (c) Where the debt was forgiven by the trust on or after 19 February 2004, did

    the private company become presently entitled to an amount from the net

    income of the trust estate after the debt was forgiven but before the earlier of ? ? the due date for lodgment and the actual date of lodgment of the trustee‟s return

    of income for the trust the current year?

    If the answer is no to questions (b) and (c), you have completed the checklist. If the answer is yes to either question (b) or question (c), continue to questions (d) within G4.

(d) Was the whole amount of the present entitlement not paid to the private

    company from the trust before the earlier of the due date for lodgment and the ? ? actual date of lodgment of the trustee‟s return of income for the trust for the

    current year?

    If the answer is yes to question (d), the trust may be deemed to have paid a deemed unfranked

    dividend to the shareholder (or associate of a shareholder) of the private company. If the answer is no to question (d), Subdivision EA will not be applicable to the debt forgiveness. You have completed the checklist.

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